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30 Apr 2003 : Column 135WH—continued

Financial Services Industry

4 pm

Mr. Mark Lazarowicz (Edinburgh, North and Leith): I welcome the opportunity to say something today about the financial services industry. Given that this is a short debate, I intend to concentrate on how it affects Scotland, and Edinburgh in particular, where it is the major private sector employer in my constituency. I should declare a couple of interests at this stage. First, I am a board member of the Centre for Scottish Public Policy, which has recently received some support from Co-operative Financial Services, and also in a voluntary capacity I am the chair of the parliamentary contact group for Scottish Financial Enterprise, which is the umbrella body for all the leading companies and firms in the Scottish financial sector. Indeed, I am indebted to Scottish Financial Enterprise for providing me with briefing material for this debate, which presents a very positive picture of the state of the financial services industry in Scotland.

That positive picture of an important part of the economy in Scotland contrasts with the picture of gloom that some of the doomsayers have been trying to paint, no doubt for their own purposes in the run-up to tomorrow's elections for the Scottish Parliament. It is worth emphasising the importance of the financial services industry to the Scottish economy as well as the economy of the UK as a whole. It is a large industry and it is a major contributor to wealth and employment.

A study undertaken in 2000 by the respected Fraser of Allander Institute for Scottish Financial Enterprise and Scottish Enterprise estimated that the sector directly employs or supports more than 180,000 full-time equivalent employees in Scotland, which is 10 per cent. of all FTE employment in Scotland. Significantly, it is also one of the fastest growing sectors of the Scottish economy: over the past eight years output from financial services companies in Scotland has grown by approximately 50 per cent., compared with 12 per cent. for the Scottish economy as a whole. The sector has also been growing faster in Scotland than in the UK as a whole, expanding at more than twice the rate of the sector in the whole country.

What may be of particular interest for the debate held here at Westminster is that the Scottish financial services industry, which has been recognised as one of the leading industries in Europe, has in recent years moved into an even more prominent position compared with its European rivals and competitors. Scotland—that means predominantly Edinburgh and Glasgow, although there are other important centres for the industry, such as Aberdeen, Dundee, Perth, Dunfermline and Stirling, to name just a few—is the sixth largest equity management centre in Europe.

Scotland is also sixth in Europe in terms of the life and pension funds managed. In January 2002, Scotland came out in the survey as the number six banking centre in Europe, behind London, Switzerland, Spain, Germany and Italy, but ahead of France, Belgium, all the Scandinavian countries and Ireland. What is even more remarkable is that Scotland no longer has the sixth position in Europe as a banking centre. A few months ago SFE updated its survey. It found that Scotland is not sixth, fifth, fourth, or even third, but is now the

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second most important banking centre in the whole of Europe, behind only London in its European and international importance. Indeed the chief executive of SFE tells me that when his survey reached that conclusion, he was so surprised he thought he had better check his figures, so he collected the figures afresh from another source and ran the calculation again, achieving the same result, confirming that Scotland was indeed the second centre in Europe. Those figures are impressive and show how that industry has benefited from the stable economic platform that has been established in the UK by the Chancellor and his colleagues in the Treasury.

However, we also need to remember that the benefits of that positive performance are not restricted to just a few high fliers in the financial industry. The financial services sector has been growing at four times the rate of the Scottish economy as a whole, and therefore has made a contribution to jobs that has helped to keep the Scottish unemployment rate at its lowest level for many decades. We know from individual case studies that many people made redundant from the microchip plants of Motorola, or NEC in West Lothian, near Edinburgh, have found jobs in financial companies.

The latest figures show employment in the banks, building societies, insurance companies and fund managers at 99,000. Such employment has been increasing annually since 1996, and it is now one of the most significant contributors to the general prosperity of the Scottish economy.

The financial services industry in Scotland is important in the nation's economic success, and in particular in ensuring secure employment, and it is therefore vital to create the conditions to ensure that it continues to prosper. It is also essential that we reject any political and economic experiments that would gamble with the livelihoods of so many people in Scotland, and especially in Edinburgh, about which I am particularly concerned. I will therefore mention an opportunity for further growth that is now within the reach of the Scottish financial industry but requires Government action if it is to be grasped fully. I will also speak about a peril that now faces the industry. I hope that the Minister will address those two points in his response.

Although England is overwhelmingly the largest market outside Scotland for Scottish financial products and services, in the past 10 years most Scottish financial companies have begun to sell into individual European markets, either directly or through joint ventures with local companies. Europe represents a very large potential market for Scottish-based financial services companies, particularly in the provision of long-term savings and pensions and the management and administration of investment funds. Europe is now Scotland's second biggest market after the United Kingdom. I am told that several of the non-British companies that have established financial services operations in Scotland in the past few years are already doing, or intend to do, a large amount of work in Scotland for customers in Europe.

Unfortunately, there are obstacles to Scottish companies—I am sure that the same is true for companies in the rest of the UK—selling into European markets. Those obstacles include language differences, culture, and transport links, some of which are easier to

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tackle than others. However, some of those factors are under the control of politicians and Governments, such as the currency difference between the UK and most of the rest of the European Union. It is my view that the Scottish financial services industry would suffer, as would the rest of industry, if we were to be excluded in the long term from the single European currency. However, I do not wish to speak at length about that issue today, as I am sure that the Minister would refer me to future opportunities to discuss it.

However, if the Scottish financial industry is to be able to take maximum advantage of the opportunities to grow its market elsewhere in Europe, the Government must address the question of regulatory differences, which can act as a powerful protectionist factor and constrain the ability of the dynamic financial services industry in places such as Scotland to compete on a level playing field in some other European countries.

I know that it is the view of many of the major players in the Scottish financial services industry that Scottish companies have much more to gain than to lose through the completion of the single market in financial services across the EU. I support their call that the European Commission should be encouraged to take forward its action plan intended to bring into being a single regulatory framework for financial services by 2005. For that reason, I welcome the announcement made by the Chancellor in his Budget speech that he will urge Europe's competition authorities proactively to investigate barriers to competition, starting with financial services. I am sure that that commitment will be welcomed in the Scottish financial services sector, and I should be interested to hear from the Minister how that plan will be implemented. I hope that he will take the opportunity to consult the important Scottish industry as he makes progress with the plan, and will consider a visit to Edinburgh to meet some of the leaders of the sector.

That is the opportunity that we must grasp. As I said earlier, there are also threats to the Scottish financial industry. In the last few minutes available to me today, I shall say something about the most immediate peril: the threat that would arise if the Scottish financial industry, as a result of constitutional shenanigans, found itself cut off from what is still overwhelmingly its most important market—that in England, which is 10 times the size of the Scottish market. Because we are part of the same United Kingdom, that market is open to the Scottish financial services industry on equal terms to those on which it is open to any London-based company. The people to whom I speak in the financial services industry tell me that they want to maintain that level playing field, and maintain a single regulatory system for the financial services industry throughout the UK.

That single market and single regulatory system would be under threat were Scotland to leave the UK. We now have long-term stability, brought about by the Government's policies and a monetary policy managed independently by the UK central bank. No one knows what arrangements would be put in their place in a separate Scotland. Would there be a Scottish pound? Would an independent Scotland keep the pound sterling? If it did, that would hardly make all the uncertainty and disruption of independence worth while. Would an independent Scotland seek to join the euro? Would it be allowed to do so, given that the

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spending policies of the Scottish National party and the Scottish Socialist party would breach, by vast amounts, the limits set on members of the eurozone? Would there be an independent Scottish central bank, or would Scotland's monetary policy be set by the finance committee of a Scottish Parliament?

That presents us with the unattractive prospect of an uneasy coalition of the SNP and the Scottish Socialist party sitting down to decide how much the Scottish Executive could borrow and the rate at which they would attempt to set a Scotland-based lending rate. If Scotland ended up with a separate currency from England, that would increase the costs of Scottish financial products for customers in England, who would be much more likely to move their custom elsewhere.

I know that Scottish nationalists and others who support separation do not like to talk about such issues, but they are fair questions to ask, and particularly appropriate to a debate on the financial services industry. There is no doubt that the prospect of years of constitutional uncertainty and wrangling would introduce a major threat to the Scottish financial services industry. It is uncertainty that frightens off existing and potential customers. After all, how many customers of Scottish financial services companies would risk keeping their money in Scotland if they thought that Scotland's economic and taxation policies were going to be decided by the SNP and Tommy Sheridan's SSP? Billions of pounds would flow out of the Scottish economy, hitting jobs in Edinburgh hard.

It would not just be English customers who would be frightened off. Many Scottish customers of financial services companies would be likely, I am sure, to seek safer homes for their savings. That is just what happened in Quebec in the run-up to the independence referendum held by the Quebec nationalist Government a few years ago. The SNP has the same policy of keeping Scotland in suspense, should it be elected to power, by holding an independence referendum at some secret date in the next four years.

That uncertainty, if it came about, would hang a sword of Damocles over the jobs of 100,000 people in Scotland, many thousands of whom work in my constituency. Not only would people who work in the financial services industry would be at risk of losing their jobs; the financial services industry and its employees buy goods and services from many other industries. Printers, legal and accountancy firms, and the IT industry have important contracts with the financial services industry, which would be at risk if the existing UK economy were to broken up and Scotland were to separate itself from its most important market.

I hope that the Minister can say something about the threat to the financial services industry in Scotland that would arise if those who would seek to divorce Scotland from the rest of the UK were ever to get their way.

4.15 pm

The Economic Secretary to the Treasury (John Healey) : I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on securing the debate, and on setting out in such clear and persuasive terms the importance of the financial services sector not only to his Edinburgh constituents but to the economic health of Scotland.

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My hon. Friend is right to draw attention to this subject. Of the top 20 companies located in Scotland, 10 are in the financial services sector. They account for 70 per cent. of the profits generated by those top 20 companies. With a flourishing retail and corporate banking sector, a substantial life assurance and pension presence, and a fast-growing investment management expertise, the Scottish financial services sector exhibits strength and breadth in depth.

At the heart of that dynamic sector, despite activity in other parts of Scotland, is the vital centre of Edinburgh, which provides the pool of expert knowledge and skills that maintains Scotland in the premier league of locations for providers of financial services in Europe. The Government are working in close partnership with the Scottish Executive to encourage a strong financial services sector in Scotland.

In June 2001, Scottish Enterprise, the Scottish Executive and Scottish Financial Enterprise launched "Investing in our Future". That action plan was developed in partnership with the financial industry to focus on the challenges and opportunities for the future growth of Scotland's financial services sector. I understand that good progress is being made in implementing the plan.

Although my hon. Friend is right to sing the praises of the financial services industry in Scotland, he is also right to warn of the damage to the financial services industry in Scotland, and hence to the wider Scottish economy, that would follow should anything be done to jeopardise the strong UK policy framework that has fostered the strength and growth in that sector.

In response, I should like to focus on some of the key elements of that policy framework, which has been so important both at the European level, to which my hon. Friend drew our attention, and domestically. Those are essential for the continued success of the Scottish and the wider UK financial services sector.

The importance of financial services to the economy as a whole has been well stated. It is also worth stressing the importance of the Scottish economy to the overall strength of the UK's financial services sector. A full 11 per cent. of jobs in UK financial services are located in Scotland. The Scottish financial services industry has been, and remains, central to the continued success and strength of the UK financial services sector as whole. The clear links and dependencies between the industries north and south of the border are highlighted by the fact that England remains Scotland's most popular market for investment.

The financial services industry in the UK will continue to flourish and to make a key contribution to the wealth of the nation only if the macro-economic environment is correct. The Government's economic policy framework, which has delivered a platform of low inflation and sound public finances, means that the environment necessary for facilitating further development of UK financial services now exists. That was confirmed in the recent International Monetary Fund financial system stability assessment on the UK, which stated:

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What could be more damaging to essential economic stability, successful Celtic companies and the future of Scottish jobs than wrenching the country through a costly and complex divorce?

Perhaps because of the elections tomorrow, the Scottish National party fudges the issue of independence with a policy of fiscal separation, which is motivated by the desire not to build Scottish competitiveness but to break the British political connection. In doing so, it puts at risk Scottish jobs and successful Scottish firms, especially in the financial services field, which my hon. Friend is rightly so concerned about. Recognition that the UK's policy framework is leading the field internationally must not make us complacent about seeing reform elsewhere. As my hon. Friend has urged, the UK has been a determined advocate of further European liberalisation in the financial services field.

We brought the issue to the top of the political agenda during the last UK presidency when, at the Cardiff summit, Heads of Government agreed to the financial services action plan, which aims to deliver an integrated EU financial services market. We have kept up that pressure and, at the Lisbon summit in 2000, secured agreement that the financial services action plan should be completed by 2005.

Creating an integrated EU financial services market will enable firms to cut the cost of raising capital and it will benefit consumers by giving them a wider choice of competitively priced and better-developed products. The FSAP is an important tool, but putting legislation on the statute book is not enough. It is important that legislation be properly implemented by member states—not incompletely, with such incomplete implementation being used to hinder access to domestic financial services markets. Protectionism hinders competition and hurts consumers.

It is important that, where financial services providers encounter such barriers, they report them to the Commission, which must take effective action to tackle them. I encourage my hon. Friend to encourage the financial services providers in his constituency, and more widely within Scotland, to bring such concerns to the attention of the Commission.

My hon. Friend rightly mentioned the need to promote greater competition in European financial markets. He mentioned the Chancellor's statement to that effect in the Budget, which said:

Competition is central to the creation of an effective and integrated EU financial services market. In such markets, as in others, it is important that established providers do not use their market position to hinder new entrants. In that respect, we welcome the Commission's ongoing inquiry into cross-border clearing and settlement. Where UK financial services providers feel that their market access is restricted by unfair competition, it is important that they bring it to the

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attention of the Commission, and it is important that the Commission takes effective action. Again, I encourage my hon. Friend to pass the message on to the financial services providers in Scotland.

The Treasury has, for some time, been working closely with the financial services industry, including representatives from Scotland, to identify the barriers to the creation of a more integrated EU system. Treasury Ministers and senior Treasury officials hold regular round tables with industry and consumer representatives to discuss the issues. The Treasury particularly welcomes the recent report on single market barriers, which was produced by a number of financial services industry trade associations and firms, including from Scotland. It identified more than 80 individual barriers to the creation of a genuine single market for financial services in Europe, and it forms a substantial agenda for action. I also know that the report was well received in Brussels.

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Effective and efficient financial markets are important for the reasons set out by my hon. Friend, but they also stand behind the development of all other areas of the economy. To make real progress towards the creation of a comprehensive single market, we need to recognise the important contribution that the EU's financial centres—not just London, Frankfurt and Paris, but also Edinburgh—make to the EU economy.

A national approach to issues of strategic importance to the UK as a whole is needed, and financial services are a leading example of such an area. The strength of the UK's financial sector, in which Scotland and Edinburgh are so significant, means that it is vital that the UK has a strong voice in discussions in Europe on financial services regulation and competition and on progress towards a single market. Neither the UK nor Scotland would benefit from speaking with separate voices; indeed, both would be damaged if we ever did so.

Question put and agreed to.

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